The British government said yesterday it will take a majority stake in Lloyds Banking Group and guarantee toxic assets, leaving only two major British banks outside the state's control.

The state will increase its ownership of the group from 43 per cent to 65 per cent and insure £260 billion pounds (€290 billion) worth of its toxic assets.

Under the government's asset protection scheme terms, Lloyds has to take the first loss 'hit' of up to £25 billion on its toxic assets before the government steps in, with the bank liable for 10 per cent of further losses.

Lloyds will pay £16 billion for participating in the scheme.

As a key part of its second bail-out, Lloyds has pledged to lend a further £28 billion over the next two years in a bid to get the economy moving, with the majority going to companies rather than individuals.

It leaves just Barclays and HSBC as the only major British high street banks not controlled by the state, following the bail-out of Royal Bank of Scotland (RBS).

The British government has taken a series of steps to try to restore confidence in the banking sector and get credit flowing again.

"This agreement with Lloyds is another vital step in our efforts to clean up banks' balance sheets and give them the strength and confidence to increase their lending, said Chancellor of the Exchequer Alistair Darling.